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September’s better-than-expected official jobs report shocked pockets of Wall Street on Friday, prompting traders and some investors to consider a greater likelihood of another Federal Reserve rate hike in less than four weeks.
With the U.S. creating 336,000 new jobs last month — almost double what economists had expected — fed funds traders nudged up the likelihood of a 25-basis-point rate hike on Nov. 1 to 26.6% from 20.1% a day ago. Meanwhile, Treasurys sold off again, sending the policy-sensitive 2-year rate
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further above 5% and the 30-year yield
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into another 16-year high.
It’s the second time this week that data tied to the U.S.’s unexpectedly strong labor market has forced bond traders to reconsider how high interest rates need to be and for how long. Tuesday’s job-openings data, which reflected robust appetite for labor, sent 10- and 30-year rates to their highest levels since August-September of 2007. Then on Wednesday, bond traders loaded up on contracts and put record sums of money on the outcome of the Fed’s Oct. 31-Nov. 1 meeting, mostly in anticipation of a rate hike, according to Bloomberg.
Friday’s jobs data was “a blowout report, and it’ll have people thinking that the Fed may pull the trigger on another hike before year-end, the sell-off in rates be damned,” said Omair Sharif, founder and president of research and analysis firm Inflation Insights in Pasadena, California.
BMO Capital Markets rates strategist Ian Lyngen, senior portfolio manager Bryce Doty of Sit Investment Associates, and Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, were among those who expect Friday’s data to either boost the chances of a rate hike on Nov. 1, or at least leave such a move in play. Another quarter-point rate hike would push the Fed’s main interest-rate target to 5.5%-5.75%.
Meanwhile, big-name firms such as Goldman Sachs Group Inc.
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were taking the other side of the debate. Even after Friday’s jobs report, Goldman Sachs said that the central bank is likely done with its rate-hike campaign. Sharif of Inflation Insights said that he continues to think “December makes more sense than November” for the Fed’s next move, and fed funds futures traders see a 42.3% chance of either 25 or 50 basis points worth of tightening by the Fed by the final month of the year.
The aggressive sell-off in long-term Treasurys seen after the September jobs report moderated by the end of trading on Friday, but still left 1-month
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through 30-year yields higher for the day. All three major U.S. indexes
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also ended higher.
Friday’s nonfarm payroll report “certainly does boost the likelihood of a November hike, but I’m not sure if it pushes us over the line,” said Matt Peron, research director for Janus Henderson Investors in Denver. Next Thursday’s consumer price index for September will likely “be the deciding factor,” he said via phone.
